7 top tips for managing your business

An engineering company operated in the g________ sector and specialised in heavy steel fabrication in Paisley. We were accountants to the company since it started in 20xx.
Like most new businesses it started with a bank of two or three customers personally known to the MD and for a while the workforce was small and worked hard, the MD got more customers and more business from his existing customers. One of the customers began to grow in importance for the company, eventually taking about 80% of turnover.
The company also did some work in the h______ sector, but the kinds of project there were quite different: typically it would take a couple of months to complete one of the products and then there was commissioning and installation to handle. These products made little profit but the feeling in the company was that they had to make these as it was a specialism of one of the directors and was in his sector.
Apart from initial borrowing to fund the acquisition and working capital, the company borrowed hardly anything. It did eventually take on invoice factoring as it grew in size and jobs became bigger both in terms of volume and value.

So what did we do?

#1 The company commissioned regular monthly accounts and a narrative report. This performed two functions: firstly it kept the bank up to date with performance against targets which we had helped the company generate; secondly, it meant that the directors could keep their finger on the pulse – and this was to become important later, on as we will see.
#2 We introduced a job-costing system (using Sage Job Costing to fit the bill) to help capture project profitability information and monitor spend and projects. Job costing also allowed us to properly estimate work in progress (WIP). The trouble with WIP is that it should be measured on one of two different bases and without job-costing information would have been impossible.
Let’s look at what monthly reports identified:
• As the company grew its sales and employees, shop floor efficiency became difficult for the directors to manage on a day-to-day basis. Using a simple approach derived from the monthly reports, we could spot occasions when sales dipped that overtime hadn’t and bring this to the directors’ attention. Obviously this was after the event but when sales dipped for a couple of months and the overtime continued, the directors simply cut overtime and saved cash straight away.
• Sales for the big customer were in your face when presented with charts that demonstrated it clearly. The MD tackled this and got on his salesman's hat and in his car. Eventually he got the big customer’s share of total sales down to 60% – still too much.
• Job costing was a complicated system that thankfully integrated with both Sage Payroll and Sage Accounts, and Mary the bookkeeper/credit controller/receptionist/PA was amazing and kept everything up to date. But it allowed us to interrogate it and find out which products made most profit in terms of margin and cash. There were challenges in achieving that eg costs being charged to the wrong job by the factory – easily done: Job 101 – 10 widgets, Job 105 14 widgets, both jobs for the same customer and all being made at the same time! So we could also see within those limitations, and which customers made them profit or at least made a positive contribution to overheads.

How did it all turn out?

There were many issues, none of which were connected with the accounts. Big customer fell out with the MD: quality issues had crept in, the big customer contact changed and so she had less “loyalty” to the past, her role was simply to buy at best price and quality.
Naturally this had an impact on the company’s financial position: when a major customer pulls back orders, it’s really difficult to cut overheads that quickly and then you don’t always want to sack a chunk of skilled workforce if you believe you can get replacement work. Of course it never happened and the company folded.

So what lessons do we all need to learn from this?

• Make sure you keep your customer base widely spread – no more than 10% of total sales from any one customer.
• Know your operating ratios eg how much labour should it take to generate £10k of sales.
• Be ruthless about product profitability – don’t allow vanity or other people’s expectations to keep you in a market that it is not worth being in.
• Sack customers that don’t make you profit too. This is really hard to do in today’s environment especially, but a customer who loses you money loses your business money and you lose as a result.
• Make sure you get your numbers every month. This minimises the amount of time in which things can go wrong before you get to spot them.
• Don’t ignore information just because it is not pleasant or palatable.
• Keep your overheads as variable as is humanly possible. Aim to cut operating costs every year even when you’re making profit.

Disclaimer

This case study is derived from a real business that we worked with. Names have been changed and some of the context has been changed to help anonymise things.
It is not important that you try to identify who or when; it is important that you recognise the generic business problems and see how NGM Accountants, a professional accounting practice, is able to help.
The case study is an abbreviated history only. A full blow by blow account would not only be boring but it would tend to repeat itself and contribute little new useful information.
No responsibility is accepted by NGM Accountants for any losses or profits foregone by acting on or refraining from acting on any information contained within this case study or factsheets to which this case study refers.
Before making any decisions concerning the accounts of your business or enterprise, you should consult a professionally qualified accountant.

Jargon guarantee

It is our guarantee to you that we won’t use jargon words we don’t explain to you. So if you find any technical words in the text of the case study you don’t understand, type them into the search box at the top of every page and it will take you to a relevant factsheet.
Return to Advice page.